The inspiration for this are the events of last night as catalysed by NAMO (Indian Prime Minister – Narendra Modi). Never in my lifetime have I seen such a major transformative move happen in a few minutes.
Now that the legacy Rs. 500 and Rs. 1000 notes have all but got destroyed, I am aggressively proposing an alternate for the hoarders of this money who have NO CLUE what to do with their fortunes of Black Money that has all but gone unusable. Its called the Black Money Venture Fund.
Namo – I know that that the Voluntary Disclosure Income Scheme you announced is over. But give this scheme a dekko. Its a WIN WIN for you, the black marketers and the country.
Yes, I am proposing a Black Money Venture Fund (BMVF) for Indian Startups and Entrepreneurs.
Look around – Google, Uber, Amazon, Ola, Facebook – all are (were) startups and they have changed our lives. Therefore, to fund startups is a no-brainer.
“No one, not all the armies in the world can stop an idea whose time has come.” Victor Hugo said this immortal line (my favorite quote) and I believe The ‘Startup’ is the idea of the moment.
India’s “Black Money” ranges from US $2 trillion to US $50 Billion as stated by Wikipedia and CBI. Thus, we have plenty of supply. In the past 2 years, Indian Startups have raised about US $5 Billion. So we have at least 10X of that amount in Black Money circulation
Trivia: In 1997, the Indian Government announced a one time “Voluntary Disclosure of Income Scheme” (VDIS) for people to disclose their undisclosed wealth and pay prevailing rates of taxes and thus “make it official”. A whopping Rs. 26,000 crores were disclosed by Indians and Rs. 7,800 crores of tax collected by the government during this scheme! Then Finance Minister P. Chidambaram said, “It is my faith that, given a chance, the people of India come clean.”
As I understand, the VDIS scheme of Namo’s government that concluded in 2016 collected 65,000 crores. Good but not great.
The BMVF can be a game changer:
VC money comes from fancy suits and highly temperamental investment managers. Before NaMo came to power in May 2014, there were hardly any VC deals being made. Historically, VC money is unpredictable in the global market. Those who have lived through 2001 & 2008 know what I mean. But that does not mean that entrepreneurs need to be stalled. When VC money vanishes, entrepreneurs get punished. And I want to change that.
Black Money in the country only grows every passing year. Show me one report that proves that Black Money has decreased in circulation. Empirically, it’s reported that 1/3rd of the Indian Economy is “Black”. And come rain or shine, our GDP continues to grow.
Ask any VC and they will tell you that they look for 10-100x returns on every deal they make. That is why they invest in outliers and extremely calculated (risky and sometimes surprising) bets! It’s a “winner takes all” business. No VC I know wants a 10-20% return on his deal.
Black Money on the other hand, has a nice problem.
To begin with, it is ‘pre-tax’ money which means that if you own Rs. 100 in Black Money, technically, you should have paid the government Rs. 30 long ago in taxes. Every passing year of not paying makes you liable for fines and interest – the sum of which could well exceed the original Rs. 100 you owned in the first place. So you may pay more than you own if you get caught!
In the market, Black Money always fetches sub optimal returns. This is because it’s not ‘court worthy’! Explanation – if you lend me Rs. 100 and I refuse to pay you back, you can’t do anything because you have no legal recourse to the money. Black Money can’t really be used efficiently. Even while buying a flat from a really shady builder, you have to pay 60-70% in “White” (official money). So “Black” is essentially 2nd class money generating 3rd class returns.
Now my proposal for Namo!
As you know, Venture Capital Funds are typically structured in a 2-25% format. The managers of the Fund charge 2% every year of the Fund Size to operate it, and ‘carry’ (take home) 25% of all profits from sales of investments after the Fund Size is recouped.
Very elite institutions like Calpers and Harvard University fund the biggest of the world’s VCs – clearly you and me have not been invited to participate in the next Sequoia or Kleiner Perkins Fund raise.
For the Black Money Venture Fund (BMVF) this is my term sheet and an explanation for every term:
Black Money Venture Fund
Fund Size: Minimum Corpus – Rs. 1000 crores – Maximum – None
Explanation: We need Rs. 1000 crores (150 million US$ to get started) a minimum size – there is no need to cap the fund.
Subscription: Lots of Rs 1 lac each, to be subscribed by anyone. This can be in the form of old Rs. 500 and Rs. 1000 notes. No questions asked. The subscribers will be kept anonymous/guaranteed non-persecution.
Explanation: Creates a ‘bite sized’ opportunity for everyone! The promise is “Hey – you could be investing in the next Naukri.com via this fund!”
Operated by: A Professional Board. Let’s get Mr. KV Kamat to help us set it up just like he set up ICICI.
Explanation: We don’t want this to become another corrupt Govt. Organization
Generating Fees :
30% of the Fund goes into G-Sec (Safe Government securities) earning 6-7%. This delivers 2% return on the Corpus
Explanation: This ‘100% safe’ investment ensures that there is always the 2% to pay for Fund expenses. On say a Rs. 1000 crores fund, that’s Rs. 20 crores per year.
Generating Minimum Returns:
30% is invested in late stage deals/PE type transactions/Long term Mutual Funds (if required) earning 15-20% long term. That returns about 4-5% on the Corpus
Explanation: This is a calculated carve out to make sure that a bulk of the Corpus is invested in funds that are almost guaranteed to return money. This allows the Fund to stay liquid and deliver a minimum base return!
High Risk High Reward:
40% is invested in Startups – angel, pre-seed, seed and first round. Let’s assume that if Rs. 2 crores is given to each startup (average) then the Rs. 400 crores in cash can fund almost 200 new Companies!
Explanation: This is the soul of the BMVF. Rs. 400 crores invested in say 200 Companies chosen from the best out there. Why can’t we expect at least 1-2 companies (1% of 200 Companies) to become the next Ola or Naukri?
Summary of a Rs. 1000 crores in the BMVF:
– 2% or Rs. 20 crores is earned via Govt. Debt and is used to pay to manage the fund
– 5-6% or Rs. 50-60 crores are earned via the late stage/PE type deals or even via Mutual Funds for minimum returns and keeping the fund liquid.
– The rest of the returns can range from anything starting from -40% (losing the entire Rs. 400 crores corpus) to +250% (earning Rs. 1000 crores). In the case of Naukri and many others, VCs have made 10-100-1000 times their investments.
A 5 year lock-in into the fund and then let the bonds be tradable at Net Asset Values.
Even assuming that the Fund does very badly and destroys 40% of its Capital Value, a “Black Money” hoarder may still be happy to launder his money at 40% cost vs. the penalties of back taxes, legal cases and even imprisonment!
This is how the returns will eventually stack up:
Why is this a Win – Win – Win?
The Government starts mopping up Black Money and uses it to create monstrous opportunities of jobs and enterprise in the country. This at no cost to them.
The owners of Black Money get to park their money in something that could work for them vs. having to burn their stash!
Indian Startups get a chance to get funded by a Fund that’s local, not subject to ad hoc gyrations in the global financial market and which will only blow up in the years to come!
Call for action:
Namo: Please give me a chance to meet you and present this plan in person!!
Readers – if you have comments and ideas, please comment and I will add that to the main article if required!